There's much to digest in George Packer's 11,000-word New Yorker article on the government's prosecution of Galleon chief Raj Rajaratnam and the culture of insider trading on Wall Street. The whole article is a must-read for anyone interested in the government's handling of prosecutions in the aftermath of the financial crisis, but there are a few passages in particular that we wanted to highlight.

Packer's article describes how officials from both the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) saw the Galleon case as a golden opportunity to restore their agencies' credibility in the face of widespread public criticism following the financial crisis:

In late 2008, the financial crisis and the Bernard Madoff scandal exposed the S.E.C. to unprecedented criticism, and higher-ups at the agency pressured the New York office to bring the Galleon case early and score a quick victory....

Perhaps indictments couldn’t be brought against top bank executives, but [Preet Bharara, U.S. Attorney for the Southern District of New York] could take down Rajaratnam, and he went out of his way to give the case a high profile. It was his best chance to deter the pervasive corruption of Wall Street. One former prosecutor compared the financial crisis to international narcotics trafficking, and insider trading to street-level drug dealing. Maybe a federal prosecutor couldn’t nail Scarface, but he could always go after Stringer Bell.

However, it appears the two agencies didn't always play well together, like the time when the SEC filed civil charges against Goldman Sachs board member Rajat Gupta for passing insider trading tips to Rajaratnam:

A few days before [Rajaratnam’s] trial started, Gupta was charged with insider trading, in an S.E.C. civil suit. Prosecutors in New York weren’t pleased—they had not yet filed criminal charges against Gupta, and civil suits complicate criminal cases. The failure to charge Gupta is a much discussed mystery, but the answer might be simple: the prosecutors, consumed with other cases and with preparation for the Rajaratnam trial, might not have realized what they had on Gupta until shortly before the proceedings began. Gupta, through a spokesman, denied any wrongdoing.

The lack of criminal charges against Gupta is hardly the only mystery that has emerged in the government's post-crisis prosecutions. In December, POGO obtained and posted documents from an administrative proceeding in which SEC attorneys made accusations of possible criminal wrongdoing in a case involving Pequot Capital Management, once the world's largest hedge fund. Despite the serious nature of the SEC's allegations, including a $2.1 million “hush money” payment, there still have not been any criminal charges filed in the case.

One of the documents we posted was a sworn affidavit by Assistant U.S. Attorney Jonathan Streeter, who stated he was conducting an investigation into Pequot's insider trading, raising additional questions about the lack of criminal charges thus far. (Packer's article describes how Streeter also served as a lead prosecutor in the Galleon case.)

And what about the lack of prosecutions for the cast of characters who played a central role in the financial crisis? Bharara defended his office's record:

Until now, Bharara has not spoken at length about the lack of financial-crisis prosecutions. When I asked him about it, his even manner gave way to pent-up annoyance at “ideologues.” He said, “It bothers me a little bit when people suggest, without knowing anything, that we’re not even bothering to look. We have grand-jury secrecy—I don’t go out and announce my investigations. But I got to tell you something: where there’s smoke, we take a look. Do you have any idea how much people want to bring the case if it exists? So what could be the reason we haven’t? Sometimes people say, ‘It’s because you’re beholden to these guys,’ which doesn’t make any sense. Do we look like we’re afraid to prosecute anyone?”

Packer's article also includes an interesting passage about an anonymous tip sent to the SEC detailing Galleon’s insider trading culture:

In March, 2007, the S.E.C. briefed the F.B.I. and the United States Attorney’s Office for the Southern District of New York, which opened a criminal case. That same month, an anonymous letter arrived at the S.E.C.’s offices, postmarked Queens, March 13, 2007. “It is hedge funds like Galleon Group that create wealth for their shareholders and themselves at the expense of innocent investors,” the letter began. “Insider trading word in this fund should be changed to insider partnership and prostitution. . . . Prostitution is rampant for executives visiting Galleon. You will find that the Super Bowl parties for the executives, paid for by Galleon Group, include prostitutes and other forms of illegal entertainment. In return, the executives provide Galleon the unfair edge that the fund leverages so well.” The letter was signed “Seeking integrity in business.” The writer sounded knowledgeable about Galleon and the industry, but it was impossible to track him down.

Finally, the article raises serious questions about the SEC's ability to function as a tough cop on the beat given its severely limited resources:

And yet, nearly three years after the financial crisis, Wall Street still relies on reckless practices to create wealth. An investment banker recently described the meltdown, with some chagrin, as “a speed bump.” The S.E.C. remains so starved of resources that its budget this year falls short of Raj Rajaratnam’s net worth at the time of his arrest. The agency lacks the technology to keep track of the enormous volume and lightning speed of algorithmic trades, like the ones that caused last May’s “flash crash” of the stock market. The market has become more of an exclusive gambling club for the very rich than a level playing field open to the ordinary investor.

For those who prefer the 11,000-word version, Packer’s New Yorker article is available here.

Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO’s investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

Founded in 1981, the Project On Government Oversight is a nonpartisan independent watchdog that champions good government reforms. POGO’s investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.